A Half-Delivered Promise

The first day of the new year will mark the 20th anniversary of the North American Free Trade Agreement, or NAFTA, a deal that was meant to transform struggling Mexico by greatly increasing trade with the U.S. and Canada. Did it work? Mexico is certainly a far better country today — but NAFTA is not the only source of this change.Seen exclusively as a trade deal, it has been a success. Mexico’s exports leaped from $60 billion in 1994 to nearly $400 billion today. These exports are mainly manufactured goods, like cars, cell phones and refrigerators. An explosion of imports led to a steep drop in prices of consumer goods. NAFTA locked in macroeconomic policies that encouraged this transformation: Mexico’s authorities kept in place sound public finances, low inflation, a floating currency and liberal trade policies, fostering financial stability, bringing down interest rates and providing access to credit for many Mexicans.However, if the goals of the agreement were economic growth, greater employment, higher productivity and wages in Mexico, and discouraging outbound migration, the assessment is more nuanced. The Mexican economy has averaged only a 2.6% yearly increase in GDP, or 1.2% per capita, since 1994. Several Latin American countries — Chile, Peru, Uruguay, Colombia, Brazil — have fared better. Mexican per capita income as a percentage of the U.S.’s has changed little, from 17% to 19%. Productivity has remained flat, with some improvement in some sectors. Real incomes have remained stagnant, though falling prices of consumer goods have mitigated this.Two facts explain these disappointing results. First, in 1994, 73% of Mexico’s exports were composed of imported inputs; in 2013, the proportion was slightly higher — 75%. Practically no backward linkages were created throughout the economy: far more auto parts, chips for cell phones and semifinished components for LED TVs should have been made in Mexico. They were not. Employment in the manufacturing sector stayed stagnant and exerted no upward pressure on salaries. The number of workers in the maquiladoras reached 1.3 million in mid-2013 — a 20% rise over two decades, during which the country’s population rose approximately 33%. And because the average wage differential between the U.S. and Mexico remains the same, the number of Mexican-born persons in the U.S. has jumped from 6.5 million to almost 12 million.A second fact explains the absence of backward linkages. The purpose of NAFTA was to boost foreign direct investment (FDI), chiefly from the U.S. It didn’t happen. In 1993, FDI in Mexico was 1.1% of GDP, rising to 2.6% in 1994, but remaining stalled there until 2001. Today, it is once again 1.1% of GDP. Over the long haul, despite impressive trade numbers, NAFTA has not delivered on its economic promises.Where would Mexico be without it? Those other Latin American countries I mentioned achieved better economic growth with free-market policies, without NAFTA. Mexican economic growth was higher during 1940 — 80. It is difficult to see why absent NAFTA, the country’s productivity, attractiveness for FDI, employment and wages would have been lower.A different NAFTA might have produced better results. Many favored a European-style agreement, including labor mobility, energy and compensatory financing. U.S. and Canadian resources could have improved Mexico’s shabby infrastructure. If Mexico had opened up its oil industry, it might have sparked an investment boom, and perhaps the U.S. would have contemplated immigration reform in exchange.What is the future of Mexico and NAFTA? Twenty years on, a new impulse is both necessary and highly desirable, which is why the notion of North American integration, as laid out in books like Robert Pastor’s The North American Idea and various current U.S. task forces, has gained traction.Without replicating the European model, the inclusion of items excluded in 1994 — energy, immigration, infrastructure, education, security — is better than traveling the same road again. The answer to NAFTA’s failings may be more NAFTA, not less. nCastañeda, a former Foreign Minister of Mexico, is a global distinguished professor at New York UniversityRead more: Viewpoint: NAFTA’s Unfulfilled Promise to Mexico – TIME http://content.time.com/time/magazine/article/0,9171,2160985,00.html#ixzz2oiZWp6BD